Summary of Taxability of Loans from Overseas or Related Affiliates
Clarification has been issued for whether there is any supply involved in the transaction of granting of loan by a person to a related person or by an overseas affiliate to its Indian entity, where the consideration being paid is only by way of interest or discount, and whether any GST is applicable on the same.
Issue: Whether the activity of providing loans by an overseas affiliate to its Indian affiliate or by a person to a related person, where there is no consideration in the nature of processing fee/ administrative charges/ loan granting charges etc., and the consideration is represented only by way of interest or discount, will be treated as a taxable supply of service under GST or not.
Clarification:
- As per section 7(1)(c) of CGST Act,2017 and Schedule I, there are transaction between related parties are considered as supply eventhough there is no consideration involved. Hence when business provides loans to related parties it is treated as supply even if there is no consideration involved in it.
- As per Notification No 12/2017 Service for extending deposits, loans, advances in so far as the consideration is represented by way of Interest or discount are exempted. Hence when business provides loans or advances and earns interest or discount as payment, such service are fully exempt.
- Loans provided by overseas or related person are generally free from extra charges like processing fees or service fees only there are interest and discount on loan amount. Processing fees , often non refundable and one time charges covers administrative cost of hadling the loan application. If any fee other than Interest or discount is charged it is treated as taxable. This clarification is alligns with point 42 in sectoral FAQ on banking, insurance and stock broker, issued by CBIC.
- Banks Or Financial Institution usally charges processing or service fee when granting loan to cover the administrative charges. This fee helps to cover the tasks like reviewing the borrower ‘s credit history, undersatnding their business. checking their financial standing and assessing how the loan will be repaid.Since these process involve effort and cost, the lender charges fees such as processing fees and administrative charges or service fees. These fees treated as service provided by bank so GST is applicable on the amount.
- When loan is given between related enttites the process usually simple compared to loans from independent lenders. This is beacuse: The lender has already access information about the borrower’s business , financial standing and credibility with in group so it is not required to check background details.The lender may not require collateral to secure the loan. As there is no efforts involved in processing the loan there are no significant administrative costs. Therefore it would not make any sense to treat loans between related parties the same as loan from independent lenders. Independent lenders charge processing fess to cover their efforts which are taxable under GST, but such fees may not even exists in loans between related parties.
- In the case of loans between related parties, the lender may not charge any processing fees or administrative fees. The decision to not to charge the fees mainly depended on two factors. 1. The relationship between lender and borrower 2. The nature and amount of the loan.
- If related party or overseas affiliate gives loan without charging fees it can not be treated as supply of service. Since there is no service provided there is no need to apply GST based on Open market Value under Rule 28 of CGST Rules,2017. Im simple, if no fees are charged, GST Does not apply.
- In case of loans provided between related parties any fee in nature of processing fee or administrative fees or service fee for granting loan is charged which is over and above the amount of interets and discounts , then GST will be applicable on such amount as it is considered as supply of service to avail the loan.
